Even with good credit scores, subprime borrowers often denied help

By Kathleen M. Howley, Bloomberg News

Wednesday, July 17, 2013

Travis Armstrong, a long-haul trucker, has made his mortgage payments for six years. His credit score, about 800, would entice most lenders. But because he owes more than his home is worth and his debt lacks federal backing, he’s stuck paying 7.5 percent interest — almost twice the rate of new loans.

President Obama has failed to win congressional backing to expand eligibility for government-backed refinancing nationally to include people with mortgages like Armstrong’s. The only inroad so far is a $10 million pilot program that began last month in Oregon that will purchase mortgages out of bonds and refinance them.

Even that won’t help Armstrong, 57. He lives about 14 miles from the only county accepting applications.

“It’s OK to skip payments and get help, or walk away and let the bank foreclose, but I’m stuck with no help ‘cause I keep making my payments every month,” Armstrong said in a mobile phone interview from Interstate 64 in Illinois as he headed to Oregon. “It feels like the world has forgotten about people like me.”

As the U.S. real estate recovery accelerates into its second year, home prices are still 26 percent below the 2006 peak and almost 10 million people are “underwater,” owing more than their homes are worth. Some of the hardest-hit regions, such as Phoenix, Ariz., and Las Vegas, are rebounding the fastest. Other cities, like Cleveland, are struggling to keep pace with national gains.

Federal efforts to put the rebound on firmer footing and boost the economy by helping subprime borrowers like Armstrong so far have fallen short, said Diane Swonk, chief economist at Chicago-based Mesirow Financial.

“The housing market is healing, but it’s healing unevenly,” Swonk said. “Part of clearing out the bottom and keeping the momentum of the recovery going is putting underwater loans on firm ground.”

Expanding eligibility for the government’s Home Affordable Refinance Program, or HARP, is at the top of the White House’s agenda for housing. The effort is dubbed ‘Where’s my refi?”

Treasury, which funds the nation’s anti-foreclosure efforts, supports the program, said Andrea Risotto, a spokeswoman. Four years after the peak of the foreclosure crisis, Treasury has spent only a fifth of the $38.5 billion of funds from the Troubled Asset Relief Program, or Tarp, set aside for housing.

“This is where you get to the heart of the subprime lending problem — these expensive private loans where people kept paying,” Swonk said. “It’s easy to forget they are still out there.”

Borrowers who refinanced through HARP in the first quarter had an average interest-rate reduction of 2.1 percentage points and will save about $4,300 in the first 12 months of the new loan, according to mortgage financier Freddie Mac. Much of that cash goes right into the economy, said Christopher Mayer, a professor at Columbia Business School in New York.

“There’s a real benefit to the overall economy when people refinance their mortgages and put money into their pockets to spend,” said Mayer. A refinancing “also puts household balance sheets on firmer ground,” he said.

The economy grew at a 1.8 percent pace in the first quarter, a number revised downward from the previous estimate of 2.4 percent, the Commerce Department said June 26. The rate in the second quarter probably slowed to 1.6 percent, according to the average estimate of about 86 economists in a Bloomberg poll.

“Another expansion to Harp when rates were at rock bottom would have given a big boost to the economy,” Mayer said. “With higher rates, the economic benefit becomes smaller.”

The start of the Oregon program to refinance private-label loans, those not guaranteed by Fannie Mae or Freddie Mac, came two weeks after rates rose from a near-record low of 3.35 percent in early May. The average for a 30-year fixed mortgage reached a two-year high of 4.51 percent last week after the Federal Reserve said it may begin tapering its bond buying program later this year. Costs are still near historic lows with the rate down from 6.8 percent in 2006, more than 10 percent in 1990 and 18.6 percent in 1981.

“We once thought that mortgage rates could never go below 5 percent, and now we think a rate of four and a half is high,” said Mesirow’s Swonk. “People would still save money and stabilize their finances by going down to anything around the 5 percent level.”

While expanding Harp would benefit homeowners, it wouldn’t benefit investors, said Walt Schmidt, a mortgage strategist at FTN Financial. Bondholders in private-label securities would lose a paying loan, and potential buyers of government-backed securities would fear another mid-stream change in eligibility standards, he said.

“The fact that Harp was changed” would concern investors, Schmidt said. “After all, what would stop another revision to Harp to prepay their new security at some point in the future?”

The government created Harp in 2009 to add to its housing programs. The Home Affordable Modification Program, known as Hamp, helps homeowners who have fallen behind on mortgage payments renegotiate loan terms. There’s also Home Affordable Foreclosure Alternatives, or Hafa, to help owners sell homes for less than they owe and escape the remaining debt.

For Harp, borrowers have to be current on their mortgages. They aren’t required to have the 20 percent equity in their properties lenders typically stipulate for a refinancing. The program was expanded in 2011 to include all government-backed mortgages — instead of the limit to mortgages 25 percent or less underwater in the first version — and some fees were lowered. The new version is called Harp 2.0. In May, the deadline for Harp was extended to 2015.

Sen. Jeff Merkley, D-Ore., has proposed legislation to refinance mortgages held in private-label bonds by setting up a national trust to purchase and refinance loans similar to the Great Depression’s Home Owners’ Loan Corporation that returned a profit to the Treasury after helping 1 million homeowners. The Oregon pilot program, confined to the state’s Multnomah County that includes the state’s capital of Portland, is similar to that proposal though on a smaller scale.

“There have been many different programs like this discussed at the federal level, but none of them has gotten any traction,” Columbia’s Mayer said. “Oregon may end up being a model for some other states, and Treasury has generally been supportive, but the odds of a program on a national level are fairly low.”

The Oregon refinancing program uses funds from the Hardest Hit Fund, established by Treasury in 2010 to give $7.6 billion to the nation’s capital and 18 states that had price declines of more than 20 percent during the housing bust or had high unemployment during the financial crisis, including California, Arizona, Nevada, Ohio, Illinois, and North and South Carolina.

So far, only about 20 percent has been spent, according to Treasury data. Other states with the funds have shown interest in the Oregon program, and are free to copy it if they wish, said Risotto, the Treasury spokeswoman.

“The terms of the Hardest Hit funds allow participating states to share promising ideas like the Oregon program with each other,” Risotto said. “We’ve helped facilitate some of those conversations.”

While the real-estate market is gaining at the fastest pace since the height of the boom, the share of borrowers who owe more than their homes are worth was about 20 percent in the first quarter, down from 23 percent at the end of 2011, according to CoreLogic Inc. There’s a larger group that lack the 20 percent equity needed for a traditional refinancing.

In the first-quarter, the median price for a single-family home in metropolitan Portland gained 22 percent, about twice the national pace, according to the National Association of Realtors. Still, values there remain more than 20 percent below a 2007 peak. Someone who bought a $350,000 home then could be about $77,000 underwater today.

Someone who got a $350,000 mortgage in Phoenix that year probably is now more than $150,000 underwater, despite this year’s surge in prices. A borrower would have to contribute that amount of cash plus the funds needed to get a 20 percent equity stake to qualify for a non-Harp refinance.

“People seem to think that because prices have gained, it means everyone is above water now, or close to it,” said Matt McHugh, a mortgage broker at Alliance Capital Partners in Portland. “It shows an amazing lack of understanding of what happened in these hardest-hit markets.”

Travis, the trucker, who bought his home in St. Helens, Ore., in 2006 for $138,500 using a subprime mortgage, said he has been trying to refinance for two years.

“I have a good income, and I have a good credit score, but that won’t do me any good because I’m still $27,000 underwater,” said Travis. “No one will talk to me.”